What You Need to Know About the Different Home Loan Products

Before applying for home loan products, take time to understand your options. While a conventional product like the fixed rate mortgage may seem best for some, it may not be your best choice. It all comes down to how long you plan to live in the home you are purchasing.

Adjustable Rate Mortgages

Adjustable rate mortgages (ARMs) have lower interest rates, which is very appealing to a first-time home buyer, but those low rates do require a bit of a gamble. You get that low interest rate for a certain amount of time, and then it switch to the current rate. If the rate it switches to is higher, you'll find your mortgage payment of interest and principal climbs sharply. This can be detrimental if you are already struggling to pay your monthly bills. Most home loan officers feel that ARMs are best for people who know they will be moving from their home in a few years.

Fixed Rate Mortgages

Fixed rate mortgages generally have a life of 15 or 30 years. They are the least risk because your mortgage payment never changes during the life of the loan, unless you refinance. You are assigned an interest rate when closing the loan and that interest rate will not change. This makes it the best mortgage to choose if you plan to stay in the home you are buying for many years or decades. A fixed rate mortgage payment includes a portion of money to go against the principal and some that pays the interest.

Home Equity Loans

If you own your home and need to borrow money for emergency repairs like a leaking roof, failed septic system, or new well, a home equity loan is often helpful. To qualify, you must have paid off enough mortgage so that you actually have equity in your home. Equity is the difference between what your home is worth and what you owe on it. Home equity loans often have shorter lives than a mortgage, so they are paid off more quickly than a mortgage. Like fixed rate mortgages, your payment covers both the interest and principal.

Interest-Only Mortgages

An interest-only mortgage is not as common now as it was a decade ago. These mortgages generally last for 5 or 10 years before you must convert to a 15- or 30-year mortgage. For the first period of an interest-only mortgage, your interest rate, depending on the terms set forth in your loan, may change every month. Your mortgage payment covers only the interest charged for borrowing the money, so you never build up equity. In addition, if your lender changes your interest rate during the month and your last mortgage payment wasn't enough to cover the interest charges, you may find yourself owing additional money when the mortgage changes to a more conventional mortgage product.

Jumbo Mortgages

Banks and mortgage lenders have maximum limits for the amount of money a person can borrow. When the mortgage amount exceeds the loan limit, a jumbo mortgage is required. Jumbo mortgages generally exceed $417,000 or $625,000 (depending on the state and city) and can be used on a primary residence, rental property, or vacation home. Required down payments are much higher than on a typical mortgage, and you must have exceptional credit in order to qualify. Again, the payment covers both principal and interest.